Expected credit losses will help banks get a deeper understanding of their portfolio mix
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The Reserve Bank of India’s draft guidelines on expected credit loss (ECL) for banks, if implemented as is, could result in lenders re-pricing loans upward and re-draw their lending strategy, experts say.
“Expected credit losses will help banks get a deeper understanding of their portfolio mix and help them to either price their portfolio right to factor in the risks or rebalance their portfolio towards clients and products that offer higher risk adjusted returns. Banks are already thinking in this direction and with the ECL implementation providing the right data points, we will see these changes happening,” said Vivek Iyer, partner and national leader-financial services, Grant Thornton Bharat.
businessline earlier reported that the regulator could consider approving bankers’ request to lower the provisioning requirement on stage-2 loans to 1-3 per cent from proposed 5 per cent under the draft ECL guidelines. Bankers requested to reconsider the proposal as they currently make only 0.4 per cent provision for most standard and stressed assets. They say in segments like home or vehicle loans, there is a 50 per cent average recovery rate from overdue and non-performing assets (NPAs). Stage-2 advances are essentially loans that are overdue for 61-90 days.
A mindset change
Abizer Diwanji, Founder at NeoStart Advisors, says ECL will be a major mindset change for banks wherein they will have to analyse data and estimate ECL basis historical information such as standard deviations, volatility in bond markets, among other factors. India did not implement IFRS norms for banks in past as lenders were not adequately capitalised and had higher NPAs, which is not the case presently.
“When an expected loss is to be computed for accounting, even when banks give loans, they will start computing expected loss on that exposure. And they will rightly so build it into price. So, the credit markets will become more towards what real risk-based pricing should be rather than what it is today, which is quite arbitrary,” he said.
A senior PSU banker said loan rates may rise by 5-10 basis points (bps) upon full implementation of ECL norms for large banks and higher for smaller and mid-size peers. Small- and mid-size lenders with higher exposure to unsecured loans may move towards secured loans more, he said.
Published on December 24, 2025
